We always want to produce at the most economical quantity-price combination. Graphically, the intersection of the supply curve and the demand curve for the product will indicate the equilibrium point - where there is neither a shortage nor a surplus.

• A surplus occurs when there is too much supply and not enough demand at a particular price
• A shortage occurs when there is too much demand and not enough supply at a particular price.

Eventually, the market will shift toward equilibrium. The ability of the competitive forces of supply and demand to establish a price where selling and buying decisions are synchronized or coordinated is called the rationing function of prices.

Changing Supply and Demand Curves

Demand Curve

• All else constant, a decrease in demand causes a decrease in equilibrium price and quantity demanded.
• All else constant, an increase in demand causes an increase in equilibrium price and quantity demanded.

Supply Curve

• All else constant, a decrease in supply causes an increase in equilibrium price and a decrease in equilibrium quantity supplied.
• All else constant, an increase in supply causes a decrease in equilibrium price and an increase in equilibrium quantity supplied.

Complex Cases

• If both supply and demand curves change, the result is indeterminate - the changes on equilibrium price and quantity depend on how much each curve has changed.

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